Assessment Period Remains Open in Partnership Case

In Blak
Investments, 133 T.C. No. 19 (2009), the Tax Court applied
Sec. 6501(c)(10) to extend the assessment statute of limitation
for a taxpayer with an undisclosed listed transaction on a
return due prior to October 22, 2004.

Background

This case involved a transaction in which two partners (1)
borrowed Treasury securities and sold them in the open market (a
short sale), (2) contributed the short sale proceeds, as well as
the obligation to cover the short sale, to a partnership in
exchange for interests in that partnership, and (3) claimed that
their bases in the partnership were increased by the short sale
proceeds but were not reduced by the obligation to cover the
short sale. After the contribution, the partnership redeemed the
partners’ interests, and the partners claimed significant losses
on their federal income tax returns. Neither the partnership nor
the partners had adequately disclosed their participation in the
transaction on their federal income tax returns for the 2001 and
2002 tax years, which were filed on October 15, 2002, and
October 15, 2003, respectively. The IRS issued a final
partnership administrative adjustment (FPAA) on October 13,
2006, disallowing the losses and imposing accuracyrelated
penalties.

The Tax Court held that the transaction at
issue was a listed transaction because it was substantially
similar to the sonofboss transactions described in Notice
200044, which determined that those are listed transactions. The
more interesting issue in the case, however, was whether the
effective date of Sec. 6707A precludes the application of Sec.
6501(c)(10) to the transaction at hand.

Statute of
Limitation Applicable to Partnership and Partner Assessments

Secs. 6501(a) and 6229(a) contain the statute of
limitation rules applicable to partnership and partner
assessments. Sec. 6501(a) contains the general rule limiting the
period in which the IRS can assess tax to three years from the
date a return is filed. Sec. 6229(a) guides the timely issuance
of an FPAA and provides that an FPAA may be issued within three
years from the later of (1) the date on which the partnership
return for the tax year was filed or (2) the last day for filing
the return for that year, determined without regard to
extensions.

Sec. 6501(c)(10) may extend the statute of
limitation on assessment under certain circumstances. It
provides that if a taxpayer fails to disclose on a return or
statement for any tax year information required under Sec. 6011
for a listed transaction, as defined in Sec. 6707A(c)(2), the
period of limitation does not expire until one year after the
IRS is given this information. Sec. 6501(c)(10) was enacted as
part of the American Jobs Creation Act of 2004, P.L. 108357
(AJCA), on October 22, 2004, and was effective for tax years for
which the period for assessing a deficiency had not expired
before October 22, 2004.

Sec. 6707A, which imposes
penalties for failure to disclose reportable and listed
transactions, was also added to the Code by the AJCA and was
effective for returns due after October 22, 2004, that were not
filed prior to that date. Sec. 6707A(c)(2) defines the term
“listed transaction” as “a reportable transaction which is the
same as, or substantially similar to, a transaction specifically
identified by the Secretary as a tax avoidance transaction for
purposes of section 6011.”

The Interplay and
Applicability of Secs. 6501(c)(10) and 6707A

The
taxpayer in this case argued that because Sec. 6707A is
incorporated into Sec. 6501(c)(10), the effective date of Sec.
6707A should control; therefore, Sec. 6501(c)(10) cannot apply
to any transaction for which a return or statement was due on or
before October 22, 2004.

The Tax Court acknowledged that
Sec. 6707A(c) applies to statements and returns due after
October 22, 2004, while Sec. 6501(c)(10) applies to tax years
for which the period for assessing a deficiency did not expire
before October 22, 2004. The court concluded:

Because AJCA makes section 6501(c)(10) applicable for tax
years for which the period of limitations remains open as of
the date of enactment of the AJCA, section 6501(c)(10) may
apply to transactions which are required to be disclosed on
returns due well before that date and which therefore would
not be subject to a section 6707A penalty if left undisclosed.
For that reason, application of the effective date of section
6707A to section 6501(c)(10) would render the express
effective date of section 6501(c)(10) meaningless, violating
the cardinal principle of statutory construction.

Conclusion

The Tax Court held that Sec.
6501(c)(10) is effective for tax years for which the period for
assessing a deficiency did not expire before October 22, 2004,
and that the effective date of Sec. 6707A, defining a listed
transaction and incorporated into Sec. 6501(c)(10), had no
bearing on the application of Sec. 6501(c)(10) in this case.
This meant that the limitation period for assessment of tax
resulting from the adjustment of partnership items for the 2001
tax year was open under Sec. 6501(c)(10). This demonstrates that
taxpayers with undisclosed reportable or listed transactions in
tax years for which the Sec. 6501(a) statute of limitation was
open on October 22, 2004, may have potential exposure.

This publication contains general information only and Deloitte is not, by means of this
publication, rendering accounting, business, financial, investment, legal, tax, or other
professional advice or services. This publication is not a substitute for such
professional advice or services, nor should it be used as a
basis for any decision or action that may affect your
business. Before making any decision or taking any action that
may affect your business, you should consult a qualified
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this publication.

EditorNotes

John Miller is a faculty instructor at Metropolitan Community
College in Omaha, NE. Kathy Petronchak and Julia Lagun are with
Deloitte Tax LLP in Washington, DC. Ms. Petronchak is a member
of the AICPA Tax Division’s IRS Practice and Procedures
Committee. For further information about this column, contact
Mr. Miller at johnmillercpa@cox.net.

The winner of The Tax Adviser’s 2014 Best Article Award is James M. Greenwell, CPA, MST, a senior tax specialist–partnerships with Phillips 66 in Bartlesville, Okla., for his article, “Partnership Capital Account Revaluations: An In-Depth Look at Sec. 704(c) Allocations.”

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